Question

Activity Based Costing Maxey & Sons manufactures two types of storage cabinets-Type A and Type 8 and applies manufacturing overhead to all units at the rate of $160 per machine hour. Production Information follows. Type A 32.000 Type B 60,000 Anticipated volume (units) Direct-naterial cost per unit Direct-labor cost per unit The controller, who is studying the use of activity based costing, has determined that the firm's overhead can be identified with three activities: manufacturing setups, machine processing, and product shipping. Data on the number of setups, machine hours, and outgoing shipments, which are the activities' three respective cost drivers, follow. Type A Total Type B 140 90,000 Setups Machine hours Outgoing shipments 320 64,000 zee 150 154,000 350 The firm's total overhead of $24,640,000 is subdivided as follows: manufacturing setups $5,376,000; machine processing, $12,784,000; and product shipping, $4,480,000. Required: 1. Compute the unit manufacturing cost of Type A and Type B storage cabinets by using the company's current overhead costing procedures 2. Compute the unit manufacturing cost of Type A and Type B storage cabinets by using activity-based costing 3.15 the cost of the Type A storage cabinet overstated or understated (le, distorted by the use of machine hours to allocate total manufacturing overhead to production? By how much? 4. Assume that the current selling price of a Type A storage cabinet is $185.00 and the marketing manager is contemplating a $50 discount to stimulate volume. Is this discount advisable? < Prey 2 of 2 Next > o ri e arch 3

Answer 1

31 1. Compute the unit manufacturing cost of Type A and Type B storage cabinets by using the company's current overhead costing procedures. Type A Predetermined overhead rate (A) Machine hours (B) Manufacturing overheads ( AB) = (C) Number of units (D) Manufacturing overhead Per Unit (C/D) 160 64000 10240000 32000 320 Type B 160 90000 14400000 60000 240 Type A Type B Direct Material Direct Labor Manufacturing overhead Manufacturing Cost Per Unit 48 53 320 72 53 240 365 421 46 2. Compute the unit manufacturing cost of Type A and Type B storage cabinets by using activity-based costing. 47 Activity Manufacturing setups Machine Processing Product Shipping Total Estimated Overheads (A) Allocation Base (B) Activity Rate (A/B) 5,376,000 320 16800 Per setup 14,784,000 154000 96 Per machine hour 4,480,000 350 12800 Per outgoing shipments 24,640,000

Activity Manufacturing setups Machine Processing Product Shipping Total Activity Rate (A) Type A(B) 16800 96 12800 Type B(C) 180 64000 200 140 90000 150 Type A (A*B) 3,024,000 6,144,000 2,560,000 11,728,000 Type B(A*C) 2,352,000 8,640,000 1,920,000 12,912,000 Total Overheads assigned (A) Number of Units Produced (B) Overhead Cost Per Unit (A/B) Type A 11,728,000 32000 366.50 Type B 12,912,000 60000 215.20 Type A Type B 48 12 Direct Material Direct Labor Manufacturing overhead Manufacturing Cost Per Unit 366.50 467.50 53 215.20 340.20 71 72 3. Is the cost of the Type A storage cabinet overstated or understated (i.e., distorted) by the use of machine 73 hours to allocate total manufacturing overhead to production? By how much? Yes, the type A storage cabinet is understated. Manufacturing Cost Per Unit according to ABC Manufacturing Cost Per Unit according to use of Machine hours Undestated by 467.50 421 46.50

81 4. Assume that the current selling price of a Type A storage cabinet is $485 and the marketing manager is contemplating a $50 discount Current Selling Price Less Manufacturing Cost Per Unit Profit 485 421 64 Yes, this discount is viable as the profit is 64 and if the discount of 850 is given to stimulate volume then still the company earns a profit of (64 - 50 ) = 14 Per unit.